How RSU State Tax Works When Moving States
Moving states with RSUs creates distinct tax events. Learn how your tax obligation is determined by where you worked to earn shares vs. where you live at sale.
Restricted Stock Units (RSUs) are a form of equity compensation where an employer promises to deliver company stock to an employee after a vesting schedule is met. Unlike stock options, an employee does not need to purchase the shares to receive them. State taxation on RSUs can be complex for employees who relocate during the vesting period. This article explains how states tax RSU income when a move is involved.
State Taxation When RSUs Vest
When RSUs vest, their fair market value is treated as ordinary wage income, similar to a salary or bonus. This income is subject to federal and state income taxes, plus payroll taxes like Social Security and Medicare. Your employer reports this income on your Form W-2, calculated by multiplying the number of vested shares by the stock’s fair market value on the vesting date.
State taxation of RSU income is governed by “income sourcing.” This principle dictates that income is taxed by the state where the work was physically performed to earn it. Therefore, even if you move before your RSUs vest, your former state of employment can still tax a portion of that income. Your residence at the time of vesting does not solely determine which state can tax the income.
Employers are required to track work locations to properly withhold and report taxes to the applicable states. As a result, your company may issue a W-2 that reflects income allocated to multiple states based on your work locations.
Allocating RSU Income After a Move
When you work in more than one state during the vesting period, the RSU income must be allocated between them. The standard method is a formula based on workdays. To find the portion of income for a specific state, divide the days worked in that state by the total workdays in the entire vesting period. This calculation should only include workdays, excluding weekends, holidays, and vacation days.
For example, an employee is granted RSUs that vest over four years. The employee works in State A for the first three years and moves to State B for the final year. If there were 750 workdays in State A and 250 in State B, the total is 1,000 workdays. Consequently, 75% of the RSU income is sourced to State A and 25% is sourced to State B.
This allocation applies even when moving to or from a state with no income tax. For instance, if you work for two years in a high-tax state and one year in a no-tax state during a three-year vesting period, two-thirds of the RSU income is still taxable by the high-tax state. Conversely, if you work one year in a no-tax state and three years in a high-tax state, the high-tax state will tax 75% of the income. Accurate record-keeping of your work locations is necessary to apply this formula correctly.
State Capital Gains Tax on RSU Sales
A second taxable event occurs when you sell the shares received from your vested RSUs. After vesting and paying the initial income tax, you own the stock outright. Any subsequent change in the stock’s value is treated as a capital gain or loss, which is taxed separately from the ordinary income at vesting.
The cost basis for your shares is their fair market value on the vesting date, which is the same value used to calculate your ordinary income. A capital gain is the difference between your sale price and this cost basis. For instance, if shares vested at $100 and you sell them for $120, you have a $20 capital gain per share.
Unlike the income tax at vesting, capital gains tax is determined by your state of residency at the time of the sale. If you move to a new state and establish residency before selling your shares, the capital gain will be taxed by your new state. Your former state of employment has no claim to tax this gain.
This distinction is important for tax planning, as moving to a state with a lower or no capital gains tax can reduce your liability. For example, selling shares while a resident of a no-income-tax state means you would owe no state tax on the capital gain. The holding period also matters for federal taxes, determining if the gain is short-term (held one year or less) or long-term (held more than one year).
Filing State Tax Returns for RSUs
If your RSU income is sourced to multiple states, you must file multiple state tax returns: a resident return in your home state and non-resident returns for other states where you earned income. The resident return reports all income, while non-resident returns report only the income sourced to that state.
To prevent double taxation, your resident state offers a “credit for taxes paid to another state.” This credit reduces your home state tax by the amount you paid to the non-resident state on the same income. The credit is limited to what your resident state would have charged on that income.
You must complete the non-resident tax return first to determine the tax liability. This amount is needed to claim the credit on your resident state return. You should attach a copy of the non-resident return to your resident return as proof of payment.
For example, if you live in State A and paid $5,000 in taxes to State B on sourced RSU income, you would claim a $5,000 credit on your State A tax return. If State A’s tax on that same income would have only been $4,000, your credit would be limited to $4,000. This system ensures you effectively pay the higher of the two tax rates on the doubly-taxed income, but not both.